Why Forex trading is not like gambling
It is still amazing that in this day in age there are still people out there that think Forex trading, or any type of trading, is the same as gambling. To be fair, the inexperienced trader or someone who has never traded before do have a point. The aim is simple – you put your money into the market place, have a maximum amount in your mind that you are willing to lose and then hope for the best. If the odds are stacked in your favor there is a ‘chance’ that you will make some money. However, this view does not take into account any qualities, skills or attributes traders need to have in order to succeed.
Let’s start with the one thing that Forex trading and gambling do have in common – risk. There is no hiding from it; trading is risky and so is gambling. However, setting up any kind of business is also risky. Does that mean that someone who created a successful business started off with a gambling attitude? I think not. It is more likely that they had a business plan which they stuck to and controlled any kind of risk they had in their path. The same applies to trading. We all know it’s risky but it is the control of that risk, daily trading plans and the discipline applied that makes a difference between a good and bad trader. Without the discipline no trader stands a chance.
In reality, it is this risk that most people are not willing to take on because it is charred with negativity or the possibility of failure. This is not a bad thing; it simply means they are more comfortable working for a business (that was set-up with risk in mind) and receiving a monthly pay check as a result. If they are to excel, their talent will get recognized after time and they will hopefully become a master in that field. This model is probably the most used.
Good vs. bad trader
If a trader’s daily gains/losses are +50%, -40%, +30%, +10%, -60% it could be very hard to find employment or even confidence in themselves. This is simply because of the ‘yoyo’ effect on his balance sheet. All this says is that the trader treats the market in a gambling manner. Most trading floors prefer traders with daily gains/losses of +3%, +2%, +5%, +3%, -1%, + 3% and so on. Small and frequent gains gain trust in the traders Forex trading strategies and usually result in more capital being credited into their trading account. So, even if the gains stay at the same, small percentage rate, the actual amount of profit is greater.
Forex trading strategies
Forex trading strategies are key to any trader’s success. So, let’s compare them to a gambler’s strategy. A horse racing gambler will pick a horse based on wins, current racing circuit success, age, odds and the other horses in the race. To get the most profit, they need to do this before the race starts. They can change their mind mid-race but the odds gradually decrease and almost make it not worth it.
A trader however, bases his Forex trading strategies on the surrounding market conditions where the currency is already in flow (race) and where the trading chart is showing them a visual representation of human behavior in the market. So, to follow a trend, traders would wait for the trend to start and join that trend to gain profits. In a nutshell, he waits to get into a trade until the market shows him it is clear to do so. This is just one type of trading.
Their appetite to risk in each strategy will based on the historical success of their trading system in the same market conditions that have happened over time thus increasing his chances of being right. If he is wrong, they have a stop loss that will minimize their loss. Each trader has to be skilful enough to know which fundamental daily news/data releases will not cloud their judgement. If they get caught out and a piece of data completely reverses their trend they have the ability to completely switch their position. The point is that trading is much more adaptable to market conditions than betting and the very change in market conditions presents constant opportunities.
Of course, there will be cynics and this may include traders that have not been successful. To be honest, world needs cynics because they provide the non-cynics with the opportunity to explain. With that said, trading is hard. If you think it is easy and you will make money overnight you are mistaken. Even if you acquire the discipline required, keeping it active is hard. A small slip in concentration can be detrimental as there are simply too many factors to consider when getting into a trade.
Forex trading is a risky business and in order to be successful all traders have to acquire discipline. If you want to know more about trading visit our Forex trading strategies section on our website.
Article was written by Dragan Lukic from “Capital Forex Training”.